government and the economy role of government money and banking the federal reserve government...

Government and the Government and the EconomyEconomy

Role of GovernmentRole of GovernmentMoney and BankingMoney and BankingThe Federal ReserveThe Federal ReserveGovernment FinanceGovernment Finance

RoleRoleThe Role of GovernmentThe Role of Government

Private businesses create private goods- goods that can Private businesses create private goods- goods that can be used by only 1 person (shoes, clothes)be used by only 1 person (shoes, clothes)The Gov’t creates public goods- goods that can be used The Gov’t creates public goods- goods that can be used more than once by many (parks, roads)more than once by many (parks, roads)Gov’t knows that providing these public goods is positive Gov’t knows that providing these public goods is positive for entire societyfor entire society externality externalityGov’t makes sure monopolies do not form- a monopoly Gov’t makes sure monopolies do not form- a monopoly forms when there is NO competition for a good/serviceforms when there is NO competition for a good/serviceAntitrust laws are laws to control monopoly power and Antitrust laws are laws to control monopoly power and promote competitionpromote competitionGov’t worries when mergers occurGov’t worries when mergers occur when 2 or more when 2 or more companies join together to form a single companycompanies join together to form a single company

RoleRole

Regulating the MarketRegulating the Market11. Natural Monopolies. Natural Monopolies- sometimes it - sometimes it

makes more sense to only have 1 makes more sense to only have 1 company make a productcompany make a product gov’t must gov’t must regulate that company, howeverregulate that company, however

2. 2. Advertising and Product LabelsAdvertising and Product Labels- truth - truth in advertisingin advertising

3. 3. Product SafetyProduct Safety- gov’t in charge of - gov’t in charge of recalls on faulty productsrecalls on faulty products

RoleRole

Measuring the EconomyMeasuring the Economy

1. GDP 1. GDP measures economic growthmeasures economic growth total total amount of goods/services produced in a yearamount of goods/services produced in a year– Real GDPReal GDP reflects growth of the economy after reflects growth of the economy after

inflation has been taken into accountinflation has been taken into account– Economy does not remain steady at all timesEconomy does not remain steady at all times The The

Business CycleBusiness CycleEconomy can Economy can expandexpand- real GDP goes up (~10 yrs)- real GDP goes up (~10 yrs)

RecessionRecession- real GDP goes down- real GDP goes down

RoleRole

2. Unemployment 2. Unemployment measures economic measures economic growth- High UR= bad economygrowth- High UR= bad economy

– When UR is high, government uses When UR is high, government uses fiscal fiscal policypolicy changes in gov’t spending to offset changes in gov’t spending to offset URUR

3. Inflation3. Inflation is a measure of the economy is a measure of the economy when prices gradually increase, while when prices gradually increase, while income remains the sameincome remains the same reduces reduces purchasing power of consumerpurchasing power of consumer

RoleRole

5. Stocks and the Stock 5. Stocks and the Stock MarketMarket measure the measure the economyeconomy

– Stock is a portion of a Stock is a portion of a company you can buycompany you can buy

– Stock prices change Stock prices change based on supply and based on supply and demanddemand

– Stocks are bought and Stocks are bought and sold at a stock exchangesold at a stock exchange

– We measure the We measure the economy based on an economy based on an average of the stock average of the stock prices of about 500 prices of about 500 companiescompanies

Money and BankingMoney and Banking

Money and BankingMoney and BankingMoney has 3 functions:Money has 3 functions:– Medium of exchangeMedium of exchange– Store of ValueStore of Value– Measure of ValueMeasure of Value

Money is anything that people are willing to Money is anything that people are willing to exchange for goods- exchange for goods- Coins and CurrencyCoins and Currency are are the most popularthe most popularMoney is valuable because we are positive Money is valuable because we are positive others will find it valuable tooothers will find it valuable too


The Financial SystemThe Financial System

Ppl. take their money to banks and banks use Ppl. take their money to banks and banks use that money to lend to other ppl/bus.that money to lend to other ppl/bus.

Several types of banksSeveral types of banks– Commercial banksCommercial banks- offer financial services to - offer financial services to

individuals and businessesindividuals and businesses– Savings and loan associationsSavings and loan associations- typically loan - typically loan

money to ppl. to buy homesmoney to ppl. to buy homes– Credit UnionCredit Union- banks that operate for a particular - banks that operate for a particular

business or groupbusiness or group


How Banks OperateHow Banks OperateBanks are businesses- they are started by Banks are businesses- they are started by investorsinvestorsBanks need ppl to make deposits into checking Banks need ppl to make deposits into checking accounts and savings accountsaccounts and savings accountsSometimes customers loan the bank some Sometimes customers loan the bank some money for a limited time and then get their money for a limited time and then get their money back, plus interestmoney back, plus interest certificate of certificate of depositdepositBanks are in charge of making loansBanks are in charge of making loans money in money in circulation actually growscirculation actually grows


Changes In BankingChanges In BankingFirst bank of US was owned by Federal Gov’tFirst bank of US was owned by Federal Gov’t 1791 1791Some states made their own banks and issued their own Some states made their own banks and issued their own currencycurrency1863- 1863- The National Banking ActThe National Banking Act created a national created a national currency and combined state and federal bankscurrency and combined state and federal banksThe Federal ReserveThe Federal Reserve was created by the gov’t to be the was created by the gov’t to be the bank’s bankbank’s bankFederal Deposit Insurance CorporationFederal Deposit Insurance Corporation (FDIC) (FDIC) promises to insure consumer’s money from crisispromises to insure consumer’s money from crisis Great DepressionGreat Depression

Federal ReserveFederal Reserve

The Federal Reserve SystemThe Federal Reserve System

This is the central bank of the USThis is the central bank of the US when banks when banks need money they come to the Fedneed money they come to the Fed

12 Federal Reserve Banks12 Federal Reserve Banks

The Federal Reserve is a gov’t agency and the The Federal Reserve is a gov’t agency and the president selects the chairmanpresident selects the chairman

The Federal Open Market CommitteeThe Federal Open Market Committee makes makes the decisions that affect the economy as a whole the decisions that affect the economy as a whole by changing the money supplyby changing the money supply


Functions of the FedFunctions of the Fed1. Acting as the Government’s Bank- holds 1. Acting as the Government’s Bank- holds

gov’t money, prints money, etcgov’t money, prints money, etc


2. Conduct Monetary Policy- control supply of 2. Conduct Monetary Policy- control supply of moneymoney

Fed can raise or lower the Fed can raise or lower the interest rateinterest rate (how (how much its costs to borrow money)much its costs to borrow money)Fed can charge member banks more or less for Fed can charge member banks more or less for loansloans discount ratediscount rateFed can raise or lower Fed can raise or lower reserve requirementreserve requirement amount of money banks are required to keep in amount of money banks are required to keep in the Fedthe FedFed can change money supply through Fed can change money supply through open open market operationsmarket operations- buying and selling US - buying and selling US bondsbonds

Government FinanceGovernment Finance

The Federal GovernmentThe Federal Government

Congress and President work together to Congress and President work together to create create budgetbudget blueprint of how the gov’t blueprint of how the gov’t will raise and spend moneywill raise and spend money

Gov’t uses Gov’t uses Fiscal YearFiscal Year (12 month period) (12 month period)


The Budget ProcessThe Budget Process– February- P. proposes budget to CongressFebruary- P. proposes budget to Congress– Congress passes Congress passes budget resolutionbudget resolution- adds - adds

up how much spending and revenues for up how much spending and revenues for countrycountry

Mandatory SpendingMandatory Spending: spending that does not : spending that does not need annual approval (Social Security)need annual approval (Social Security)Discretionary SpendingDiscretionary Spending: gov’t spending that : gov’t spending that must be approved each year (defense)must be approved each year (defense)Congress passes Congress passes appropriations billappropriations billlaw to law to approve spending approve spending

Government FinanceGovernment FinanceRevenues and ExpendituresRevenues and Expenditures

– About ½ of revenue comes from income tax, then from About ½ of revenue comes from income tax, then from payroll tax to pay for Social Security and Medicarepayroll tax to pay for Social Security and Medicare


3 types of Taxation3 types of TaxationProgressiveProgressive: The more you make, the more you : The more you make, the more you paypayRegressiveRegressive: The percentage you pay goes down as : The percentage you pay goes down as you make more moneyyou make more moneyProportionalProportional: Same percentage of taxes regardless : Same percentage of taxes regardless of incomeof income

Gov’t spends most of its money Gov’t spends most of its money ((expendituresexpenditures) on Social Security) on Social Security retirement money for elderlyretirement money for elderly#2 is #2 is national defensenational defense


Managing the EconomyManaging the EconomyGov’t must learn to function with either a surplus Gov’t must learn to function with either a surplus or deficitor deficitWhen in debt, gov’t must use When in debt, gov’t must use deficit deficit spendingspending borrowing money to pay for bills borrowing money to pay for billsGov’t sells Gov’t sells bonds bonds (promise to repay loan at a (promise to repay loan at a later date, plus interest) to American ppl. to pay later date, plus interest) to American ppl. to pay for billsfor billsThe gov’t achieves a The gov’t achieves a balanced budgetbalanced budget when when spending equals revenuespending equals revenue NC must have a NC must have a balanced budgetbalanced budget


Impact of national debtImpact of national debt– Interest payments-gov’t must pay interest on Interest payments-gov’t must pay interest on

past debt, causing taxes to increasepast debt, causing taxes to increase– Interest rate- when gov’t borrows money, it Interest rate- when gov’t borrows money, it

leaves less for citizens to borrowleaves less for citizens to borrow interest interest rates increaserates increase


Fiscal PolicyFiscal Policy

Gov’t stimulates economy by lowering Gov’t stimulates economy by lowering taxes and increase spendingtaxes and increase spending

Economy has automatic stabilizers to help Economy has automatic stabilizers to help citizens immediatelycitizens immediately– Unemployment BenefitsUnemployment Benefits– Progressive income taxProgressive income tax

government and the economy role of government money and banking the federal reserve government...

Documents

federal govt

public goods goods

product govt

private goods goods

loans money

consumers money

clothesthe govt

govt spending